By Nell Mackenzie
LONDON (Reuters) - Hedge funds' bullish equity positioning in Europe is in line with some of the highest levels of the past five years but the appetite for stocks may fade amid rising interest rates and dour signals from bond markets, JP Morgan said in a note to clients on Thursday.
European share prices may have been supported since November by hedge funds covering their short positions, essentially a bet that an asset price will weaken, the bank said, noting that there was less buying of UK equity.
The STOXX 600 index, a broad measure of European shares, has risen around 20% from lows hit in October and is holding up even as bond markets sell off in a sign that aggressive rate hikes will weaken economic growth ahead.
Trend funds, or CTAs, which frequently switch their buy and sell positions, have stayed bullish for longer than they usually would in European equities, the note said.
These funds ride the price of an rising or falling stock until it changes direction.
As well as closing bearish bets, some hedge funds have added long positions since February, although the bank questioned whether this trend would continue.
"The potential for cyclicals to keep getting bought as much as they have lately - by hedge funds at least - also seems unlikely," JP Morgan said.
Cyclical stocks are those companies that typically make or sell products that do well when the economy flourishes, such as restaurants, airlines, hotel chains and automobiles.
Industrial and transport companies also saw bullish buying, the note said.
Equity funds, multi-strategy funds and computer led and trend trading were among the hedge funds involved in covering short positions and establishing long positions, it said.